Miner’s Dilemma: Sell mined tokens for FIAT or invest them?

It’s safe to say that 2017 has been the year that cryptocurrency has truly broken out and established itself as a real market force. For the first time ever, startups have raised more money from ICOs than from VC funding. For Bitcoin miners, this has been a windfall, because the rigs they invested in to make decent profits in 2016 are providing extraordinary income right now since the price of BTC has gone up from around $1,000 per coin on January 1st to over $4,300 as of the time of this publication. Aside from capital outlays to maintain their hash power, a professional miner is now left with the choice of what to do with their excess tokens. Do they go the well-trod route of selling them for USD, Euro, or GBP before investing them in more traditional assets like real estate, stocks, etc., or do they seek the incredible returns possible from investing in altcoins?

A quick primer on the economics of mining

A miner has to take three principal things into consideration for a commercial mining operation: cost of electricity and cooling, cost of equipment and real estate, and cost of reliable high speed internet. This has led to countries such as Iceland, Georgia, and China dominating the mining industry due to having very favorable conditions for all three of those considerations. Iceland may seem like a strange pick, due to the high cost of taxation, but electricity is extremely cheap, high speed internet is affordable and reliable, and Iceland’s naturally cool climate makes it easy to set up a data center that can shed heat like few other places in the world.

Biggest factors in favor of running a large mining operation

If you manage your hardware replacement plan well, you can turn a consistent profit per rig

Ability to generate different minable cryptocurrencies depending on the profitability of each one during any given month (Note that mining BTC and mining ETH require radically different setups for optimized mining. BTC requires specialized ASIC rigs, and ETH is best mined by pooling powerful video cards)

If you were big enough, whether by yourself or in a pool, you could form the backbone of an exchange and begin earning additional profit by charging fees to facilitate trades and directly selling your newly minted cryptocoins for USD, Euro, or Pounds without losing money to a hefty exchange fee

Conversely, what were the negatives of becoming an industrial cryptocurrency miner?

Necessity of investing in expensive capital outlays frequently in order to remain competitive

Volatility of coin prices could leave you operating at a loss for months at a time waiting for the market to improve

Difficulty of calculation continues to go up, but cost of electricity remains static and real estate prices rise over time, cutting into margins

BitcoinX calculation tool

Utilizing the profitability calculation tool at Bitcoinx, we can take a look at how things have changed since October of 2015, when you could expect to break even after 74 days and turn a profit of around $100 after 90 days with an Antminer S7 ASIC mining rig. For reference purposes I used the difficulty history from here and matched it with the historical price history found here. A year later in October 2016, when the Antminer S9 came out, the situation was more grim, with the added hardware costs, halving of the block reward, and stagnation of bitcoin value, a miner would actually be losing considerable money by investing in new hardware. The situation now is vastly improved, because March 27th, 2017 was the last time the price of BTC was below $1000, and it currently seems to have a steady floor of around $4,000. The S9 rigs a miner invested in back in mid to late 2016 are now turning a $200+ per month profit, but the people who invested in them have only been experiencing a solid ROI for the past few months.

In an industry that is dominated by specialized industrial scale miners, will the most profitable action be to try and grab more mining share by investing a bigger allocation of your mining profits in the arms race? The answer is likely no, it will not be. A wise business leader will tell you that if you’re good at something you should keep doing it, but to ignore more profitable opportunities that present themselves is foolhardy and irrational. And so it goes with investing the profits of a well-run mining operation. It currently takes months to recoup the expenses of upgrading your mining rigs, while cryptocurrency assets are exploding in value, offering a much more lucrative investment vehicle to build wealth. Miners should keep mining as long as it’s economically viable, but rather than sell their mined tokens for fiat, they should be seriously considering the option to buy into other cryptoassets while the market is ascending.

While cryptocurrencies can be incredibly volatile on short timelines, they’ve steadily risen over time, and have dramatically outperformed most market indices over the past three years. There have been a staggering number of ICOs (Initial Coin Offerings) over the past 12 months, and the blockchain economy is beginning to feel less like something we’re looking forward to in five years, but rather something that is happening right now. Simply put, if you’re not investing at least part of your portfolio in blockchain assets, you are very likely going to regret it five years from now, much the same way that people who didn’t invest in the tech boom of the early 90s kicked themselves later. But how does a mining specialist who has spent the last few years in an highly specialized industry know which tokens to invest in, when there are over five hundred at this point, many of which have extremely dubious claims to value?

For some, the answer is to seek out professional guidance from an analyst or firm that specializes in cryptocurrencies and blockchain projects. When the cryptocurrency market was all about Bitcoin, you could afford to be a Bitcoin specialist, but that’s not the case any more. The soaring rise of Ethereum to challenge Bitcoin, as well as the large number of ERC20 coins (tokens that interact with the Ethereum blockchain and follow its protocols), means that there is a large amount of information for any prospective investor to sift through and keep up with. Most investors are seeking passive income streams, and don’t want to become experts on every altcoin and upcoming ICO. Predictably, this had led to innovators stepping in to provide the service these investors are asking for.

Bitcoin miners

Crypto VCs and Crytpo Funds

One possibility is to look into joining a Coin Traded Fund. A coin traded fund is comparable to an electronically traded fund, where you are buying shares in a portfolio that tracks the yield and return of the assets contained therein. Two leading companies doing this are The Token Fund and Satoshi Fund, which are blockchain asset holding investment funds that include a diversified portfolio of many cryptocurrencies. The reason why funds like this are becoming popular with miners and other investors is because it gives them what they’re looking for: passive investments with good returns. They want high growth combined with reasonable risk mitigation, and professional fund managers who can accurately judge the long-term prospective value of different cryptocurrencies and blockchain assets and buy and sell accordingly. These new cryptocurrency funds act somewhat like a mutual fund, but instead of seeing 5-6% growth, currently investors are seeing over 270% growth. I don’t think I need to spell out the reasons why this is a better option than most traditional investments right now. Both of these funds feature open eligibility, in that anyone can sign up and invest in them. For clients concerned with tax issues, they will need to consult a qualified tax professional in their home jurisdiction to determine how their tax situation should be handled.

For a much more VC minded person, there is also the choice of a company like Blockchain Capital, which invests directly in blockchain companies. This company allows a user to be an angel investor, but requires a much more active role because the user must choose which projects to back. It offers a lot of interesting opportunities and professional advice, but at the end of the day, the investor must make their own choices. Blockchain Capital was the first, and is still one of the only, funds that is fully compliant with SEC regulations in the US. As a result of this, they’re limited to having no more than 100 total concurrent American clients, but can have as many clients from other countries as they deem appropriate. According to their website, $160,000 is the typical investment in one of their syndicates.

Company

Investment Strategy

Blockchain Capital

Invest directly into blockchain projects using the traditional VC model of providing funds in exchange for equity.

The Token Fund

The Token Fund balances aggression with due diligence in their risk assessment as their core strategy. Holding close to 60% of their fund in ETH and BTC, they also seek to invest in strongly performing tokens and promising ICOs.

Satoshi Fund

Satoshi Fund is a fund with an aggressive style. Over 50% of their holdings are in BTC and ETH, but they are also unafraid to buy into ICOS.

Major pros and cons of investing mined tokens into a cryptoinvestment fund

Pros:

Liquidity of assets. You can cash out on shorter notice

Passive growth of wealth

Currently offers a higher ROI than almost any other investment

Opportunity to hold a more diverse portfolio of crypto assets, distributing the volatility

Ability to invest in utility tokens as well as currency tokens

Can get in on the initial investment rounds for blockchain startups in what is primed to be the next big evolution of the tech industry

Cons:

You have to entrust your coin supply to the fund

Removes some ability to be a market maker

Limited or no input into the business decisions of the fund you invest in

Each individual must make their own choice, and at the end of the day everyone has their own tolerance for risk and their own appetite for being personally involved in the business decisions of companies they invest in. Having said that, I believe that there is a compelling case for investing in a CTF or VC fund rather than investing in traditional assets such as mutual funds, bonds, stocks, and real estate. The biggest factor for most investors is the ROI. At this time, the coin traded funds are providing a much better one than an investor could expect from other methods, and this is why an investor should carefully consider utilizing one as a way to diversify their assets.

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About the Author

Entrepreneur and private investor in blockchain startups of early stages. Passionate about blockchain technology. Writes all things about the blockchain community, Bitcoin and cryptocurrency trading, ICO and regulation. Co-founder of a crypto-assets fund The Token Fund. Former Deputy Vice-President for international development at Mail.ru Group (leading Internet company in Europe, operating Russian language social networks such as Vkontakte (VK), messengers, the world's leading email service and the largest portfolio of online games)

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